PBOC Cuts Corporate Yield Spread Most Since Crisis: China Credit

Photographer: Brent Lewin/Bloomberg

Li Keqiang, China's premier. The expanding bond market is helping Premier Li Keqiang as he seeks to staunch off-balance sheet lending known as shadow banking while ensuring companies get enough cash to avoid default as manufacturing activity and the property market cool. Close

Li Keqiang, China's premier. The expanding bond market is helping Premier Li Keqiang as... Read More

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Photographer: Brent Lewin/Bloomberg

Li Keqiang, China's premier. The expanding bond market is helping Premier Li Keqiang as he seeks to staunch off-balance sheet lending known as shadow banking while ensuring companies get enough cash to avoid default as manufacturing activity and the property market cool.

China’s corporate borrowing costs are falling the most since the global financial crisis as the central bank eases monetary policy to revive bond issuance and spur a flagging economy.

The extra yield over sovereign notes that AAA rated companies pay to sell three-year bonds has dropped 60 basis points since March 31 to 126 basis points, the most for any quarter in Bloomberg-compiled data going back to 2007. Falling borrowing costs have encouraged 1.005 trillion yuan ($161 billion) of onshore yuan debt offerings in the period, poised to surpass 1.012 trillion yuan in the whole of the first quarter.

The expanding bond market is helping Premier Li Keqiang as he seeks to staunch off-balance sheet lending known as shadow banking while ensuring companies get enough cash to avoid default as manufacturing activity and the property market cool. The PBOC pumped 120 billion yuan into the economy last week, the most since January.

“Investors’ risk appetite is rising while expectations about defaults are diminishing,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The central bank wants to maintain an appropriately loose environment to prevent explosion of regional or systematic risks.”

MSG Maker

Linghua Group Inc., a manufacturing of seasonings in the eastern province of Shandong with a local rating of AA-, shaved 10 basis points off its borrowing costs in a 250 million yuan sale of one-year securities this month compared with its last issuance of similar-maturity debt in November.

Shanxi Luan Mining Group Co., a coal producer with an AAA local rating, cut fundraising costs when it issued 1 billion yuan of one-year notes this month, down 43 basis points from a similar-maturity debenture issued earlier this year.

The offerings have added to a 13 percent increase in yuan bond sales in 2014 to 2.02 trillion yuan compared with the same period last year, according to data compiled by Bloomberg.

Rising cash supply has helped lower benchmark borrowing costs. The yield on China’s 10-year sovereign note dropped 35 basis points since the end of March to 4.16 percent as of May 23. The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 3.41 percent this quarter, the lowest since the three months ended March 2013, according to a daily fixing rate announced by the National Interbank Funding Center.

Explosive Risks

That marks a turn from last year, when the PBOC allowed the repo rate to surge to the highest levels since a funding squeeze in June drove it to a record 10.77 percent. China needs to deleverage because total liabilities in the world’s second-largest economy reached 111.6 trillion yuan in 2012 and accounted for 215 percent of gross domestic product, Li Yang, vice president of the government-backed Chinese Academy of Social Sciences, wrote in an article published in Shanghai Securities News in December.

“The central bank is trying to contain risks in deleveraging,” said Shi Lei, head of fixed-income research in Beijing at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “If you don’t contain them well, systemic risks will explode.”

Developer Debt

Shanghai Chaori Solar Energy Science & Technology Co. (002506), a maker of solar cells, in March became the first company in China to default on onshore securities when it failed to fully pay interest on a bond.

Moody’s Investors Service said this month China may have more defaults in the coming one to two years. The ratings company revised its credit outlook for Chinese developers to negative from stable on May 21 after home sales slowed and Zhejiang Xingrun Real Estate Co., a Zhejiang-based developer, collapsed in April.

“The property market is tightly linked to the financial system,” said Ping An Securities’ Shi. “More collapses could cause instability. The PBOC can’t afford it.”

Chinese listed developers’ average debt to equity ratio is 125 percent, up from 95 percent seven years ago, according to data compiled by Bloomberg. Ping An Securities’ Shi said property companies will benefit the most from the falling borrowing costs because their leverage ratios are “very high.”

China’s economy will expand 7.3 percent in 2014, less than Li’s 7.5 percent target, according to forecasters surveyed by Bloomberg. That would be the least since 3.8 percent in 1990. The growth rate in the first quarter was 7.4 percent.

‘Huge Pressure’

The yuan completed a second weekly loss last week on speculation policy makers will encourage declines to boost exports and support the economy. The currency fell 0.05 percent last week to 6.2365 per dollar in Shanghai, China Foreign Exchange Trade System prices show.

China’s economy is facing huge pressure this year,” said Huang Wentao, a bond analyst at China Securities Co. in Beijing. “The central bank is focusing on the task of stabilizing the economy this year. It has no choice but to loosen control of the money supply.”

The recent decline in borrowing costs hasn’t been big enough to stop some private companies from scrapping fundraising plans. Shanghai Ace Co. (600652), an energy investment company, said on May 20 that it suspended an issuance of 300 million yuan of bonds due to financing expenses it still characterized as high, according to a company statement. Linzhou Heavy Machinery Group Co. (002535), a manufacturer of coal mining machinery, canceled a sale of 750 million yuan of bonds on May 7 for the same reason.

“The central bank doesn’t want to see more companies collapse, so it has to allow borrowing costs to fall,” said Guotai Junan’s Xu. “If borrowing costs remain high, more companies will be unable to repay debt.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net Andrew Monahan

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